NZ dollar rides higher on Powell's dovish testimony

Andrew Cummings
July 12, 2019

The Fed is due to hold its next policy meeting at the end of this month and in congressional testimony Wednesday, Fed Chairman Jerome Powell said many central bankers believed the case for a rate cut had "strengthened" in recent weeks.

The consumer price index excluding the volatile food and energy components rose 0.3% last month, the largest increase since January 2018, after four straight monthly gains of 0.1%.

The Consumer Price Index, which tracks costs for household goods and services, rose 0.1 percent compared to May, a notch above analyst forecasts, the Labor Department reported. Powell also said 'there is a risk that weak inflation will be even more persistent than we now anticipate'.

Eric Winograd, senior US economist at Alliance Bernstein, noted that both vehicles and apparel "had been negative for the last few months and so the bounce this month is more likely payback for previous weakness rather than the start of a new trend". "Instead, these central banks move at a more glacial pace...if the Fed is going to get involved in trade wars, then it is highly likely that it will do so along the interest rate route". That can make it harder for the Fed to push inflation, which fell to 1.5% last month, back to its target.


A key measure of USA inflation, the core consumer price index will be released on Thursday.

Following the release of Powell's prepared remarks, short-dated Treasury rates fell sharply along with the U.S. Dollar. ASB Bank is forecasting that annual inflation will be 1.7 per cent in the second quarter but notes that "risks to our pick are tilted to the downside".

Earlier rounds of United States tariffs on trading partners - including China - had been dismissed as of little macroeconomic importance, with the Fed in early May still anticipating its policy rate would remain unchanged for the rest of the year.

There is still the report on the CPI due later in the day and that might further give the forex markets more clues on the way the USA dollar may behave or how the other currencies may gain or lose against the premier currency.


In June, owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.3%, matching May's gain.

The Fed chair said overall growth has also "moderated", and cited the possibility that "weak inflation will be even more persistent than we now anticipate".

Apparel prices jumped 1.1% after being unchanged in May.

But consumers paid less for gasoline last month, with prices dropping 3.6% after falling 0.5% in May. Healthcare costs increased 0.3 per cent, after a similar advance in May. Prices for these goods tumbled in March and April after the government introduced a new method and data to calculate their cost. The cost of household services jumped 0.8 percent, the most in almost 30 years, as lawn and garden service costs soared 6.1 percent, the most since December 1997.


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